The Economy's October Surprise

WASHINGTON, D.C. -- On Friday Vice President Joe Biden will travel to Los Angeles to talk up the administration's $787 billion stimulus package. Three months after the legislation passed, it may seem like there is little to show for it.

Just wait. Specifically for October.

So far, about $80 billion of the package has been pledged, and about $46 billion actually spent--less than 6%. That might seem awfully slow in the middle of a recession, but in October two big things will happen, forcing critics of the stimulus to change their tune.

The first is the reporting of gross domestic product for the third quarter of 2009. The economy took a pounding from October to March: The Bureau of Economic Analysis reported that in the last three months of 2008 GDP contracted at a 6% pace; in the first three months of 2009 it did the same.

In dollar terms, the economy shrank by about $200 billion to $11.3 trillion, from $11.5 trillion in the fourth quarter. However, that's on an annualized basis, which affects the calculations of how much the government must spend to move the GDP needle. Thus, if the government injects $46 billion into the economy in three months, this figure would be multiplied by four. This seeming sliver of spending is thus counted as $192 billion--if this spending had occurred in the first quarter of 2009, it would have almost completely counteracted the contraction in GDP.

Some stimulus money will not show up immediately in GDP. Individual tax cuts, for example, will not be felt until people receiving them actually spend the money somewhere. But most government expenditures are a direct component of GDP.

GDP is a simple calculation adding up economy-wide consumption, investment, government spending and the trade balance. For sake of argument, say that consumption and investment continue to fall at exactly their current rate, shrinking at an annualized pace of $200 billion. The White House says the stimulus package is on course to spend $550 billion in the first two years, or about $75 billion every three months for the rest of that period.

In order to fill the $200 billion hole in the economy, the White House can have only two-thirds of its scheduled money get into the economy and still close that gap.

But countless economic indicators--from consumer confidence to home prices to new jobless claims--suggest that the rate of decline is slowing on its own. If from July to September the economy would otherwise be completely flat but is instead hit with $50 billion in government funds, then we will see a report that GDP grew 6% in the quarter--a number sure to grab positive headlines. (That consumption and investment were completely moribund could end up almost a footnote.)

The stimulus package is sitting on another October surprise. An obscure provision of the act (Section 1512) calls for all recipients of federal funding, whether they are contractors or grantees, to report how many jobs were created by the stimulus money. The White House's Office of Management and Budget is developing guidance for how to make that calculation, but if the recipients have a tendency to under- or overestimate the jobs created, it will certainly be to overestimate. If recipients can plausibly claim they create more jobs per dollar, then they will be more appealing targets for future funds.

Recipients are required by law to make these estimates on Oct. 10. The White House is already reporting that more than 150,000 jobs have been created or saved, but this figure is based on some complex economic assumptions, not any direct reporting. In October, they will be able to talk up the direct reports of how many jobs have been created or saved--another number sure to grab positive headlines.

"There is no discussion of a second stimulus package," says a senior administration official not authorized to speak on the record about the stimulus. He may well be telling the truth; if the private sector of the economy is completely flat all summer, even a slow stimulus will look like a GDP- and job-creating miracle.